Medicaid Changes on the Horizon – Is it Time to Re-Consider your Estate Planning?

On August 13, 2010, the Illinois Department of Human Services, after several years of delay, issued rules to implement the Deficit Reduction Act of 2005, which will cause great hardship to the elderly who may have given assets or income away and find themselves in need of nursing home care.

Medicaid is a joint federal and state medical program for the impoverished.  The federal government offers the states money for their programs; however, the states must abide by federal guidelines on administering the program.

Under former Illinois law, a person could give assets to family members and would have to wait no more than three years before they would be eligible for Medicaid.  This three year “Look-Back” period was a maximum of three years and depended on the value of the asset gifted.

In February 2006, the federal government chose to balance the budget by increasing this Look-Back period.  The Deficit Reduction Act of 2005 (or “DRA”) requires the states to mandate a Look-Back period of five years, with ineligibility being a minimum of five years from the date an asset is transferred or the date a person is otherwise eligible for Medicaid – whichever is later.  The general consensus is that under these rules, you cannot apply for Medicaid until five years and one day have passed since you transferred assets.

The policy implication of this rule is that only the wealthy who can afford to fully pay for five years of care can safely plan for nursing home placement without the fear of being ineligible and out of money.

The Illinois State Bar Association (ISBA), through its Elder Law Section Council, took the position denouncing several of the measures found in the new rules.  Attorney Heather McPherson, the immediate past chair of the Section Council, testified before the Department of Human Services at its public hearing held in Chicago on September 13, 2010.  Her testimony outlined the concerns that the ISBA has over the new rules.  These positions are:

1. Stop retroactivity – New requirements would mandate retroactivity examining any transfer of asset that occurred after February 6, 2006, the date the federal law was passed.  The ISBA deems this to be unfair to seniors because they are being held to a standard and to rules for which they could not have been advised at the time they chose to transfer assets.  The ISBA wants these new rules only to apply to transactions entered after a final rule is enacted and sufficient notice has been provided to inform the public, such as warnings accompanying the sale of annuities.  Illinois’s existing transfer restrictions would apply to earlier transactions.  (States have discretion and no punishment for not enacting it)
2. Partial returns of disqualifying transfers must reduce the penalty – Current Illinois law (before the rule change) allows a person to return a portion of the transferred asset thereby reducing the penalty.  For instance, if you give cash to your children and then return some of it, your penalty period is reduced.  No one gains from an “all or nothing” approach as HFS’s draft proposes.  Federal law does not require Illinois to abandon its long-standing policy to give credit for partial returns of gifts that result in disqualifications.  Illinois should not abandon its current policy.
3. Do not treat income as an available asset – Federal law authorizes the purchase of a single premium immediate annuity as long as it is irrevocable and non-assignable, actuarially sound and provides for payments in equal amounts during the term of the annuity with no deferral and no balloon payments.  The federal Center for Medicare and Medicaid Services makes those identical recommendations regarding annuities.  However, the State’s proposed rules are contrary to CMS guidelines and federal law in that it will punish the applicant for the purchase of an annuity that will pay out for a time period shorter than the life expectancy of the annuitant.
4. Protect the marital unit – Illinois’s proposed rules will disallow the long held right of a community spouse (the spouse that remains in the home when the other spouse goes to the nursing home) to refuse to disclose his or her assets to the Department.  Community spouses, typically the woman, will have no choice but to divorce their institutionalized spouse in order to avoid becoming completely impoverished.  These rules encourage divorce.  Illinois should maintain its current policy of spousal refusal.
5. No separate determination of assets for backdated months – Owned assets should be verified as of the date of decision.  This policy allows applicants to purchase allowable expenditures within three months prior to the application without being penalized: hospital stays, medical equipment, pre-paid funerals, legal fees, elimination of pre-existing debt and repairs/improvements to the marital residence.  This rule goes beyond what Federal law requires and is contrary to Illinois’ current policy.
6. Illinois policy should specifically define what constitutes non-allowable transfers – Seniors should not be unreasonably penalized for ordinary family, charitable, educational, and church gifts.  These proposed standards are vague and onerous procedures requiring applicants to “prove a negative.”  The proposal is not workable or constitutional and would undermine the long-term care system.
7. Illinois must not go beyond the DRA provisions to impose additional hardships on its seniors, persons with disabilities, Alzheimer’s, or other debilitating diseases by mandating restrictions more than federal law requires  –  The Department’s proposed rules are riddled with roadblocks to eligibility that are not required by federal law.  Federal law mandates that undue hardship waivers be available in all cases of severe need.  The proposed rule contains restrictions on Special Needs Trusts, has inserted hyper-technical requirements which will discourage family members by penalizing good faith compensation for care arrangements (the new rules require documentation of any home care services provided by a family member who received compensation for their time), and attempts to re-write well-established law by treating real estate as annuities.  None of these punitive provisions were mandated by the DRA and all would create hardship and generate fruitless and expensive litigation.

If you are concerned about nursing home costs, consulting with a knowledgeable elder law attorney before taking any action to transfer assets is advisable.  These new rules are preliminary and may become finalized by the first of 2011.  With its retroactivity provisions, it is important to re-examine any planning you have already undertaken.

Thanks to Heather McPherson, the ISBA Section Council, and the DRA Task Force for sharing the testimony given before the Department at its recent hearing.